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Short-selling

The Short Selling Regulation (SSR) requires that firms notify the regulator – or disclose to the market – if they hold short positions over a certain threshold. Naked short-selling of shares is effectively banned, as is the sale of ‘naked’ Credit Default Swaps related to sovereign debt (i.e. where these are held other than the purposes of hedging). Finally, the Regulations harmonise the powers available to national regulators to restrict short selling in certain circumstances, and also provide ESMA with controversial emergency powers allowing them to act in Member States directly.

The practice of short selling (selling shares or other instruments without owning them) by hedge funds and others shot into political and public awareness in the immediate aftermath of the banking crisis. Speculators were blamed for short selling banks heavily, betting on a fall in their share prices and in the process, it was argued, rendering such falls inevitable.

There are wide ranging reviews underway of the Markets in Financial Instruments Directive (“MiFID”). This is one of the key pieces of EU legislation on financial markets, along with the Market Abuse Directive (“MAD”), which is also subject to review - considered below - (and the Prospectus, Takeover and Transparency Directives).

Latest sector news

ESMA has published its preliminary report on WHT reclaim schemes following a European Parliament request. Some EU Member States allow for a WHT on the... dividends of listed companies, which under specific circumstances can be reclaimed which raised concerns over potential abuse resulting in breaches of MAR or the Short Selling Regulation. ESMA found that the execution of these schemes did not necessarily imply breaches, but that there could be concerns about compliance with share trading reporting obligations. ESMA has launched a formal inquiry to gather further evidence from national competent authorities on the supervisory practices across the EU.

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FCA: Primary Market Bulletin 21

The latest edition of the bulletin advises market makers and issuers of new regulatory obligations that will need to be implemented for the Short Selling Regulation... and MAR in the event of a no-deal Brexit.

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FCA: Temporary transitional power in the event of a "no deal" Brexit

FCA has published press releases which outline how it would use the temporary transitional power in the event of a “no deal” Brexit. FCA is... expecting firms to begin complying with changes now with regard to certain areas: MiFID II transaction reporting; EMIR reporting obligations; issuer rules; contractual recognition of bail-in; short selling notifications; the use of credit ratings for regulatory purposes and securitisation. FCA emphasises that in these areas, it expects firms and other regulated entities to undertake reasonable steps to comply with the changes to their regulatory obligations by exit day, adding that it will act proportionately and, in the event that the UK leaves the EU without an implementation period, FCA will not take a strict liability approach and do not intend to take enforcement action against firms and other regulated entities for not meeting all requirements straight away, where there is evidence they have taken reasonable steps to prepare to meet the new obligations by exit day.